Monday, June 3, 2013

Fwd: qotd: Why does Kaiser have the highest premiums in the California exchange?

Quote-of-the-day mailing list
-------- Original Message --------
Subject: qotd: Why does Kaiser have the highest premiums in the
California exchange?
Date: Thu, 13 Jun 2013 12:44:06 -0700
From: Don McCanne <>
To: Quote-of-the-Day <>

Los Angeles Times
June 12, 2013
Kaiser's Obamacare rates surprise analysts
By Chad Terhune

In California's new state-run health insurance market, Kaiser Permanente
will cost you.

The healthcare giant has the highest rates in Southern California and
some other areas of the state, surpassing rivals such as Anthem Blue
Cross and other smaller competitors. The relatively high premiums from
such a strong supporter of the federal healthcare law surprised industry
analysts, and it has sparked considerable debate about the company's

Some experts say Kaiser intentionally bid high to avoid drawing too many
customers next year who are sick or who have been uninsured for years
and may be costlier to treat. Others suspect Kaiser was worried that
lower premiums would bring an influx of newly insured patients that
could overwhelm its in-house roster of doctors and hospitals.

"Kaiser is not as low cost as many people think," said Glenn Melnick, a
USC health policy professor. "They appear to be protecting themselves
because the people signing up in the first year are likely to be the
sickest ones."

Overall, Kaiser is the state's biggest health insurer with a 40% share
of the market.

(Marian) Mulkey of the California HealthCare Foundation said Kaiser has
regretted being the low-cost option at times in the past and being
overrun by too many members at one time. Other insurers may have more
flexibility to add doctors and hospitals to their network as enrollment

Kaiser, on the other hand, could face the costly decision to contract
with outside hospitals to absorb some of its overflow.

"We are focused on sustainable prices for the long haul," (Bill Wehrle,
Kaiser's vice president of health insurance exchanges) said. "If you
make a large mistake in this environment, it can be hard to recover.",0,7939146.story

Comment: Kaiser Permanente was the prototype health maintenance
organization (HMO) that sparked the managed care revolution, seeking
lower costs supposedly without compromising quality. So why should a low
cost leader come in with the highest premiums for Covered California -
California's new exchange that is being established under the Affordable
Care Act (ACA)?

The strategies and negotiations were secret, so we don't really know.
But there are a couple of possible explanations. Initial enrollment may
include more people with health problems who need insurance, whereas
healthier individuals may opt out since initial non-participation
penalties are very small, and they can always join later. By Kaiser
setting premiums higher, this initial influx of less healthy but more
expensive patients would be diverted to competing plans because of the
attraction of their lower premiums.

Another possible reason is that the current Kaiser patient population is
relatively stable at about 40 percent of the California insurance
market. When patients change their PPO or HMO plans that use provider
networks, they do not have as much disruption as they do when they move
into or out of Kaiser Permanente. Such a move always entails a complete
change of their physicians and hospitals. Since Kaiser realizes that
they have not only dominant market share but also a stable group of
satisfied patients who do not want any disruption in their care, they
know that they can charge a little bit more for their plans since
patients are willing to pay the modest differences to avoid such

There is another reason that is perhaps the most important of all.
Kaiser Permanente is a truly integrated health care delivery system with
its own hospitals, clinics, health care professionals and other
components of the health care delivery system. They can provide
virtually all services to every one of their plan members. Carefully
planning and executing system capacity is absolutely essential in the
Kaiser model.

Large, abrupt changes in enrollment can be catastrophic from a business
perspective. If they lose too many patients all at once they are sitting
there with expensive excess capacity that is not generating revenues. On
the other hand, if they have a sudden large influx of patients,
especially patients who would require greater amounts of health care,
they would strain their capacity, with overloads in their primary care
clinics, with patients destined for admission waiting in the hallways
because the hospital's beds are full, and with intolerably excessive
queues for patients waiting for high-tech and specialized services.
Obviously, they would have very unhappy patients.

Instead of making large, abrupt changes in their system capacity to
match large fluctuations in patient enrollment, Kaiser controls their
patient enrollment, keeping patients out if there are too many, or
increasing aggressive marketing if there are too few. Under our
fragmented, dysfunctional system of financing health care, it is only
natural that Kaiser would adjust its patient enrollment to fit its
business model rather than adjust its business model to better
accommodate patients.

This issue of capacity is important. The United States needs to improve
central planning since we have amongst the worse maldistribution of
capacity. We have too many regions with excess capacity, which causes
wasteful over-utilization, and other regions with deficient capacity,
which impairs access to needed care. As a major player, allowing Kaiser
to have autonomy in its planning takes good care of Kaiser but at a cost
of fragmenting the systemic planning that we need.

Most proposed single payer models include integrated health systems such
as Kaiser Permanente. Presumably Kaiser, like other players in the
system, would negotiate global budgets, fees and capitation rates, and
negotiate separate budgets for capital improvements.

But what about patient choice? The new accountable care organizations
(ACOs) would still ensure patient choice, especially since, under the
ACA rules, patients may not even know that they have been assigned to a
particular ACO. Should Kaiser, which, in essence, is a transparent
mega-ACO, be allowed to lock their patients into their own system when
other ACOs cannot?

Suppose their patients had the freedom to come and go as they please.
Would the patient choices be that be much different from choosing
another primary care entity that has well established referral patterns
for high-tech and specialized services, and established practice
relationships with other hospitals? Isn't the goal of expanded
information technology to provide a similar level of interconnectedness
between all providers that Kaiser has within its own system?

Instead of being a closed system, shouldn't Kaiser just be another
choice for patients within the health care delivery system? Under a
single payer system, that choice would not be based on price since
single payer eliminates the need to shop prices. Rather choice would be
based on perceived quality. Wouldn't it be better if the various
elements of the health care delivery system were knocking themselves out
to be sure that they have very contented, healthier patients?

(Changing the Kaiser Permanente model is controversial. Today's comment
should not be considered a specific recommendation, but should be used
to get people thinking about what type of structural reforms would best
serve the interests of patients - all patients, not just Kaiser's.)

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